New York, June 13, 2018 -- Moody's Investors Service ("Moody's") has today changed
Nicaragua's rating outlook to stable from positive and affirmed
its B2 long-term issuer ratings.
In Moody's view, the factors that supported its July 2017
decision to assign a positive outlook on Nicaragua's rating have
dissipated following what it believes is a marked weakening of the country's
consensus-building institutions following recent episodes of social
unrest triggered by the government's attempt to reform its pension
system.
The country's increasingly established track record of consensus-building
policymaking and the planned pension reforms for this year were the two
key drivers supporting the positive outlook. Now, however,
the shifting political and institutional landscape has increased uncertainty
regarding policy direction; and, related to that, likely
delays in pension reforms point to budgetary outcomes potentially weaker
than the rating agency had previously assumed.
The affirmation of the B2 rating reflects credit strengths including the
country's strong medium-term potential growth as well as
debt and interest burdens that are lower than peers. These strengths
balance the credit challenges posed by low per capita income, institutional
shortcomings, and a high share of foreign currency-denominated
government debt, although this external debt is mainly owed to multilateral
creditors and has a very long maturity profile.
Nicaragua's foreign and domestic currency bond and deposit ceilings were
unaffected by today's outlook change. The long-term foreign
currency bond and bank deposit ceilings remain at B1 and B3, respectively.
The short-term foreign-currency bond and deposit ceilings
remain at NP. The long-term local-currency bond and
bank deposit ceilings remain at Ba3.
RATINGS RATIONALE
RATIONALE FOR CHANGE IN OUTLOOK TO STABLE FROM POSITIVE
BREAKDOWN OF NICARAGUA'S CONSENSUS-BUILDING POLICYMAKING
MODEL
Over the past decade, Nicaragua's consensus-building
policymaking model bringing together government, business,
labor and other key institutions in a cooperative framework emerged as
an important supportive feature of the country's credit profile,
providing macroeconomic policy predictability. The presence of
a prudent and predictable policy framework with strong support from the
private sector has contributed positively to economic growth, a
condition that made Nicaragua attractive to investment in general,
and foreign direct investment in particular, relative to some other
Central American countries. Moody's decision to assign a
positive outlook last year reflected the longer-term economic and
fiscal benefits likely to be derived from the strengthening institutional
framework.
Recently, however, social protests triggered by a pension
reform unilaterally introduced by the government in April -- which
was subsequently reversed -- have significantly weakened this consensus-building
institutional setting. Attempts to maintain a national dialogue
have proven unsuccessful and increased tensions between the government
and all other sectors of society are evident. So far, there
is no indication that a constructive dialogue will emerge as the positions
of various social groups have become more polarized. While a resolution
of this political and social unrest could surface in the coming months,
it is becoming increasingly likely that the country's consensus-building
model has been permanently weakened, reducing the effectiveness
and predictability of policy.
POTENTIALLY HIGHER FISCAL PRESSURES AS THE PENSION REFORM WILL BE DELAYED
One specific driver of Moody's decision to change Nicaragua's
outlook to positive from stable in July 2017 was its expectation that
the government would address the deterioration of the social security
body's (INSS) financial position before the end of 2018.
The INSS financial deficit has grown every year since 2013, reaching
0.6% of GDP in 2017 and contributing to the exhaustion of
its cash reserves, which will run out by next year. Without
pension reform, the INSS's financial shortfall could reach
2% of GDP by 2026, with the INSS requiring direct budgetary
support from the central government from 2019 onwards.
Given the deteriorating political situation, it is now less likely
that the pension reform will proceed as planned. A set of revenue-raising
measures that were announced in April 2018 to support the INSS were cancelled
after large-scale protests broke out. In the absence of
pension reform, the central government will have to provide recurrent
financial support to the INSS. In order to preserve its own fiscal
position (i.e., moderate government deficits and favorable
debt metrics) the authorities will have to lower spending, including
scaling back on plans to increase capital expenditures on social infrastructure,
negatively affecting growth. Alternatively, they would have
to get additional financing to cover larger deficits, with reliance
on higher borrowing leading to some deterioration in Nicaragua's
debt metrics, which now compares favorably to similarly-rated
peers.
In short, as well as potentially undermining the longer-term
strength of Nicaragua's institutions, the recent political
turmoil also suggests that the fiscal and debt trajectory in the coming
years is unlikely to be as credit supportive as Moody's had assumed
last July when the positive outlook was assigned.
RATIONALE FOR THE AFFIRMATION OF NICARAGUA'S B2 RATING
The affirmation is based on the country's still favorable growth
potential over the medium term and the expectation that, despite
some deterioration, the country will be able to preserve its comparatively
favorable debt metrics in the coming years. The rating agency expects
that the current political and social unrest will negatively impact growth
this year, but still expects Nicaragua to recover in 2019 and resume
a growth trajectory of about 4% should current adverse developments
subside starting next year. Additionally, while Moody's
expects that Nicaragua will likely experience some deterioration in its
debt metrics, with the debt-to-GDP and interest-to-revenue
ratios coming to 35% and 4.5% in 2019, respectively,
Nicaragua will continue to compare favorably relative to peers --
the 'B' medians will be 60% and 9.9%,
respectively.
At the same time, Nicaragua's credit profile will continue
to be challenged by (1) one of the lowest per capita income levels among
B-rated peers, which can limit the revenue-raising
capabilities of the government; (2) a weak institutional framework,
particularly related to political institutions pertaining to the rule
of law and control of corruption; and, (3) a high degree of
government debt dollarization, although this is partially mitigated
by the fact that Nicaragua's public external debt is mainly owed
to multilateral creditors.
WHAT COULD CHANGE THE RATING DOWN
Given the still uncertain outcome of the political crisis, negative
rating pressures could emerge, potentially quite quickly,
if the ongoing social unrest and political tensions were to intensify
or persist beyond this year and undermine growth, public finances
and/or access to financial support from multilateral institutions,
which together account for the bulk of the country's sources of
financing. Additionally, as oil prices have risen and Nicaragua
still relies on oil imports -- albeit to a lesser extent than in
previous years -- and Venezuelan flows have materially decreased
over the past few years, a significant reduction in external financing
from other sources, including foreign direct investment, would
add significant external funding pressures.
WHAT COULD CHANGE THE RATING UP
A more constructive assessment could be considered if the political crisis
and social unrest were to subside and the consensus-building policymaking
tradition was quickly restored providing the path for pension reforms,
improved fiscal outcomes and increased policy predictability.
GDP per capita (PPP basis, US$): 5,849 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.9% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.7%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -2.2%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5% (2017 Actual) (also
known as External Balance)
External debt/GDP: 76.8% (2017 Actual)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 11 June 2018, a rating committee was called to discuss the rating
of the Nicaragua, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have not changed. The issuer's institutional
strength/framework, has decreased. The issuer's fiscal or
financial strength, including its debt profile, has not materially
changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Renzo Merino
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
